Switzerland has an exceptionally competitive export sector, which over the long term sets the exchange rate. In the labor- intensive domestic economy, though, comparable gains in productivity are scarcely possible. This is also because of stiff regulation in many areas (e.g. healthcare and agriculture), which mean there is little price competition within Switzerland. But export and domestic companies both hire from the same labor market and so have to offer similar salaries. The result is prices that are high in the domestic market compared to abroad.
Here too changes are emerging, though. In recent years online trading and shopping tourism have suddenly exposed a traditionally domestic sector like retail to international competition – and to an exchange rate based on the competitiveness of the export sector. Dealing with this is likely to lead to a considerable increase in automation and digitalization in the service sector: self-checkouts in the supermarket constitute no more than a first step.
Foreign investment to combat the strong franc
Fair value for the Swiss franc implies a balanced foreign trade account. But Switzerland has an annual current account surplus equivalent to more than 8% of gross domestic product, which would tend to suggest the franc is actually undervalued. However, key export industries (especially pharma), can to an extent avoid price competition. The currency will only cease to appreciate if the current account surplus is matched by equally large exports of capital.
Up until 2008, private industry invested abroad on a major scale, exporting capital. After the financial crisis, though, it was mainly the SNB that “exported” capital, by intervening in the currency markets. Over the long term Swiss industry will have to once again increase its foreign investments. If not, either the franc will appreciate considerably in the long term or the SNB will have to continue to intervene in the currency market indefinitely.
A new challenge for the Swiss economy
The overvalued Swiss franc was for a long time the prime concern of Swiss companies. But as the currency weakens, another issue is coming into focus. Rising protectionism, especially in the US but in other countries too, has long tended to be neglected. However, the headwinds facing free trade predate Donald Trump's election as US president. For some time, further market integration has been encountering suspicion and some existing achievements of free trade have even been undone.
Protectionism aside, the US tax reform is also making the economic environment more difficult for Swiss companies. As one likely impact of the tax reform both US and foreign companies will increasingly shift production to the US, creating jobs there. The effects of these measures are only likely to be felt in the long term (if at all); the pharma industry, for example, needs time to move production because of regulation and the permits required.
Current impact on the overall economy is marginal
The US is Switzerland’s second-largest trading partner after the EU. In 2017 Switzerland exported goods worth just under CHF 34bn to the US; of this, pharma accounted for the largest share at 53% and electricals and electronics for 14%. So far the current trade dispute with the US has only seen tariffs imposed on steel and aluminum. Exports of these products last year made up 1% of total Swiss exports. The US accounted for an insignificant 1% of these goods. For individual specialist companies these trade restrictions are painful, but at the level of the overall Swiss economy the effects are marginal.
If the US were to extend trade restrictions to other goods, such as EU pharmaceuticals or car imports, the impact for Switzerland would be much greater. Auto suppliers generate revenues of almost CHF 10bn per year in Switzerland, most of which is exported to Germany. Hence the Swiss economy would feel the secondary effects of trade restrictions between the US and the EU.